Read the case study below and answer ALL the questions that follow. THE NEW NORMAL MANAGERS AND OPERATIONAL RISK MANAGEMENT Senior managers of firms have traditionally been concerned with business success. To do this, senior managers attempt to deliver their corporate strategy. The Covid-19 crisis has forced people all over the world, including such managers, to reassess their priorities. This case discusses how risk assessment has become vital when adapting to the so-called new normal. The Covid-19 pandemic has caused a seismic change to the way firms conduct business and the effects will last for a considerable time. Lots of people are talking about how to deal with this new normal, and in this case we discuss how this has affected managers of financial services firms, and how they can adapt. The inability to manage business risk well often results in failure to deliver to stakeholders, resulting in reductions to profitability and cash flow and, in some cases, even threatens the firms survival. For senior managers, the traditional business risk focus has been upon strategic risk management and corporate governance. Here, we focus on what is sometimes a neglected area of attention that of operational risk management. Operational risk is defined by the Bank for International Settlements as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Any business consists of staff processing inputs into outputs, which hopefully satisfy stakeholders. The greater the value added to inputs through these processes, the greater stakeholder satisfaction ought to be. Information technology systems are put in place by the firm to make these people and processes more efficient. However, external events may impact upon people, processes and systems (e.g. natural disasters such as Coronavirus pandemic, economic conditions etc.). Although firms cannot stop these external events happening, they can control their preparations for them, and any losses by mitigating actions during such external events. Although it is true to say that most operational issues arise with, and are solved by, staff and their supervisors, departments and activities of the firm that could potentially be affected by operational risks are spread across the firm as a whole. It is, therefore, important that there is a firm-wide approach to tackling the operational risks that have been identified or those that may occur in the future. Staff across the firm should be aware of the various operational risks (and other types of risk) that will affect their roles. This should include staff at all levels in the firm including the board of directors, senior management and all other staff. Developing and maintaining the right risk management culture and attitude towards risk is a hugely influential factor in the risk management process and in the effectiveness of risk management policies and actions. Without an appropriate culture, a firm can never be fully confident that it is managing its risk properly. One of the key roles of senior management is to position a firms culture so that it best supports business objectives. This can also be seen as adapting the strategy and objectives of the organisation to best fit the prevailing culture. Either view requires senior managers to be effective leaders and to understand how leadership can affect a firms operational risk and prevailing culture. This suggests a greater understanding of cultural change would be helpful not only for senior managers, but also for those functional areas of the firm helping senior managers to effect such change, such as HR, L&D, risk management and compliance functions. Cultural change is about behavioural change. For the vast majority, the natural human disposition to being told to change is to resist. This occurs either through burying our heads in the sand hoping the change will go away or rebelling against the change reactions that are particularly understandable in the midst of a global pandemic and the stresses this causes. Bringing people on board is key to any sort of success. This involves being creative in terms of translating the vision into actionable behaviours that can be observed and recognised. Answer ALL the questions in this section.

QUESTION 1 1.1 In the context of the case study, define the term business risk, and suggest the measures that should be adopted by managers in mitigating against this risk. (15 marks)

1.2 Although firms cannot stop external events from happening, they can control their preparations for them, and any losses by mitigating actions during such external events. Using relevant theory and examples, comment on this statement. (25 marks)